High home prices cause house flippers to pull back

House flipping has seen a huge run-up in the past few years, as investors take advantage of tight supply in the market and fast-rising home prices. Popular television shows glorifying the process have also turned regular Joes and Joannas into real estate renegades. Those high prices, however, are now taking their toll.

After two straight years of gains, the rate of home flipping, defined as buying and selling a home in the same calendar year, flattened in the second quarter of this year, according to a new report from ATTOM Data Solutions. Nationwide, 53,638 single family homes and condos were flipped in the second quarter, which is 5.6 percent of all home sales during the quarter. That rate was down from 6.9 percent in the previous quarter and unchanged from a year ago.

Why the slowdown? A drop in profits.

Home flippers saw an average gross return of $67,516 in the second quarter, representing a 48.4 percent return on investment. That is down from 49 percent in the previous quarter and down from 49.6 percent in the second quarter of 2016. It also marks the lowest return in nearly two years. After peaking at 51.1 percent in the third quarter of 2016, average gross flipping returns nationwide have decreased for three consecutive quarters.

The returns are shrinking because the cost to get in is rising so fast. Home prices are were up 6.7 percent in July, year-over-year, according to CoreLogic, and the gains have been accelerating for several months. That has flippers getting more creative.

“Home flippers are employing a number of strategies to give them an edge in the increasingly competitive environment where flipping yields are being compressed,” said Daren Blomquist, senior vice president at ATTOM Data Solutions. “Many flippers are gravitating toward lower-priced areas where discounted purchases are more readily available — often due to foreclosure or some other type of distress. Many of those lower-priced areas also have strong rental markets, giving flippers a consistent pipeline of demand from buy-and-hold investors looking for turnkey rentals.”

Flippers, who used to work largely in cash, are now leveraging their investments more, turning even to low-down-payment FHA mortgages. In the priciest markets, like Denver and Boston, more than half of flips were financed with mortgages. In Seattle, where prices are skyrocketing, flipping is drying up at a faster pace.

The International Real Estate News Network (IRENN) is a fledging 24/7 cloud-based American basic cable/satellite television channel that will conjoin traditional television transmission, cord-cutting broadcasting, on demand broadcasting, and innovative new media.